Jun 5, 2021

Axios Pro Rata

Welcome to the first Saturday of June.

  • As always, feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar.
  • Playing on my Spotify: Lorde’s “Liability” and Seal’s “Future Love Paradise.”

Today’s Smart Brevity™ count is 1,066 words, a 4-minute read.

1 big thing: The new SEC

Photo illustration: Shoshana Gordon/Axios. Photo: Andrew Harrer/Bloomberg via Getty Images

The U.S. Securities and Exchange Commission has generally been a pretty sleepy regulator — as evidenced by Tesla CEO Elon Musk’s continued tweets despite a pricy settlement — but new chairman Gary Gensler might change all that.

Driving the news: In the short period since Gensler’s nomination, the SEC has taken an interest in hotly watched areas like cryptocurrencies, blank check companies, private funds and climate change.

  • Specifically, new disclosures regarding the impact on climate change are expected to be at the top of the agency’s priorities, given President Joe Biden’s focus on the issue.

Between the lines: “The indication is that [Chairman Gensler’s] a person that rolls up his sleeves and gets things done,” says Chris Hayes, senior policy counsel at the lobby group Institutional Limited Partners Association.

  • Hayes also noted Gensler was very effective as head of the Commodities Futures Trading Commission.

The big picture: Certain market trends are expected to shape the agency’s work in the near future, per Gensler’s recent testimony to the House Appropriations Committee:

  • Crypto: So far, the SEC has mostly signaled its views via enforcement actions, much to the frustration of the industry. However, Gensler’s genuine interest in the technology, along with the efforts of pro-crypto Commissioner Hester Peirce and the recent elevation of the SEC’s fintech office, suggest that the agency could be ready to deliver more regulatory guidance in this area.
  • IPOs and SPACs: The past year’s boom of special purpose acquisition companies has led to recent scrutiny from the SEC regarding disclosures and the ability to include financial forecasts that are not permitted in the IPO process.
  • Private funds: Gensler notes that the number of private equity and venture capital funds has significantly grown even in the last five years, and the emergence of new approaches and business practices raises regulatory questions around investor protections. Specifically, he points out a recent allowance for private fund managers to waive their fiduciary duties.
  • Fintech: New apps for stock-trading played a central role in recent events like the GameStop saga, prompting the agency to take a closer look at how retail investors interact with them.

Additionally, Commissioner Allison Herren Lee recently proposed that regulators consider private market reform, especially in the areas of investor accreditation and Regulation D, the cornerstone of venture capital and startup fundraising.

What they’re saying: “As our capital markets have grown, though, the SEC has not grown to meet the needs of the 2020s,” Gensler told the House Appropriations Committee.

Yes, but: There’s a difference between a regulatory agency’s ambitions and what it can actually accomplish.

  • It has to follow specific rule-making processes that include the time-consuming tasks of publishing proposals and collecting comments from the public.
  • The agency also has to consider the political risk of bold changes if they have undesired effects such as additional disclosures pushing companies to remain or go private at higher rates, warns Kansas University professor of law Alexander Platt, who focuses on enforcement of securities laws.

What’s next: The SEC’s comment period on climate change impact disclosure ends on June 15, so it may move to make some proposals after that.

2. Meet the commission

Illustration: Aïda Amer/Axios

Gary Gensler (chair, Democrat):

  • Nominated by Joe Biden; took office in April 2021. Term expires in 2021.
  • Was most recently teaching at MIT, including a course on cryptocurrency.
  • Gensler served as chairman of the CFTC under Barack Obama, helping lead the agency through the aftermath of the Great Recession.

Hester M. Peirce (Republican):

  • Nominated by Donald Trump; took office in January 2018. Term expires in 2025.
  • Was previously at the Mercatus Center at George Mason University, and has also worked for the Senate Banking, Housing, and Urban Affairs Committee, the SEC and in private law practice.
  • She’s been affectionately nicknamed “crypto mom” by the industry for her pro-cryptocurrency stances.

Allison Herren Lee (Democrat):

  • Nominated by Trump; took office in July 2019. Term expires in 2022.
  • Was previously at the SEC as a counsel to two commissioners and as a member of the staff, and has also taught law internationally and worked in private practice.

Elad L. Roisman (Republican):

  • Nominated by Trump; took office in September 2018. Term expires in 2023.
  • Was previously chief counsel for the Senate Banking, Housing, and Urban Affairs Committee, and has also worked at the SEC, NYSE Euronext and in private law practice.

Caroline A. Crenshaw (Democrat):

  • Nominated by Trump; took office in August 2020. Term expires in 2024.
  • Was previously at the SEC as a counsel to two commissioners and as part of the staff. She’s in the Army Reserve and worked in private practice before her government service.
3. Bringing down the hammer

Illustration: Sarah Grillo/Axios

Enforcement actions like lawsuits are one of the SEC’s most powerful tools to stop bad actors and telegraph the agency’s views. In 2020 alone, the regulator issued 715 enforcement actions.

Yes, but: It’s no match for Elon Musk’s will to tweet whatever he wants.

  • Despite agreeing to have his market-moving tweets vetted by a lawyer after running afoul of the law with a 2018 tweet about taking his company private, Musk isn’t doing that, according to the Wall Street Journal.
  • The agency warned Tesla in 2019 and 2020 that some of his tweets were out of bounds, but the company argued they weren’t within the scope of the agreement. Per the WSJ, the agency has since decided that more warnings would be counterproductive, and it’s unclear what it can do to get its way.

Meanwhile, the agency is also fighting a battle in court against crypto company Ripple and two of its executives, alleging it illegally sold securities in the form of its digital token XRP.

  • While it’s not the first time a cryptocurrency defendant has been indignant about its actions (Kik, for example, even raised $5 million to “defend crypto” in the face of its own SEC tangle), the Ripple lawsuit could be the most consequential case so far.
  • It will set an important precedent for the rest of the industry and the issuance of digital tokens — even more important in the continued absence of new laws or regulatory rules on the subject.
  • Most recently, the two sides are duking it out over Ripple’s attempt to end the case by claiming it didn’t get a “fair notice” about allegedly illegal conduct from the SEC before it filed its lawsuit. Should that defense prevail in court, it would make it really hard for the agency to sue other cryptocurrency companies in the future.
📚 Due Diligence
  • Market excess raises eyebrows at the SEC (Axios)
  • SEC Has Limited Options to Regulate Elon Musk (WSJ)
  • Biden SEC pick is no stranger to crypto (Axios)
🧩 Trivia

It may feel like it’s been around forever, but the SEC is actually less than a century old.

  • Question: What act of Congress established the agency? (See answer below.)
🧮 Final Numbers
Expand chart
Data: U.S. Securities and Exchange Commission; Chart: Michelle McGhee/Axios

🙏 Thanks for reading! See you on Monday for Pro Rata’s weekday programming, and please ask your friends, colleagues and SEC lawyers to sign up.

Trivia answer: The SEC was established by Section 4 of the Securities Exchange Act of 1934.